Transat A.T. Inc. (TRZ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Transat conference call. Please note, this call is being recorded. I would like to turn the meeting over to Andrean Gagne, Senior Director, Communications, Public Affairs and Corporate Responsibility. Please go ahead, Ms. Gagne.

[Foreign Language] Hello, everyone, and thank you for joining us on our third quarter earnings call ended July 31, 2026. Annick Guerard, President and CEO; and Jean-Francois Pruneau, our Chief Financial Officer will provide an overview of the quarter and comment on the current operational situation and commercial plans. Jean-Francois will also discuss our financial results in detail. We will then take questions from financial analysts -- questions from journalists will be taken offline after the call. The conference call will be conducted in English. The questions may be asked in French or English. As usual, our supplementary disclosure has been updated and is available on our website in the Investors section. Jean-Francois may refer to it when he presents the results. Our comments and discussions today may include forward-looking information regarding Transat's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Forward-looking statements represent Transat's expectations as at September 10, 2026 and therefore, are subject to change after today. Our actual results may differ materially from any stated expectations. Please refer to a forward-looking statement in Transat's third quarter news release available on transat.com and on SEDAR+. With that, I would like to turn the call over to Annick for opening remarks.

[Foreign Language] Good morning, and thank you for joining us. Our third quarter results were significantly impacted by persistently high fuel prices, which outweighed the progress achieved across the business and place considerable pressure on profitability. At the same time, demand for our product remained resilient. Revenue and traffic grew and our [ transatlantic ] network continued to perform well despite a highly competitive environment. While fuel prices remain outside of control, our response is not. We are actively managing capacity, cost, liquidity and network deployment to mitigate the impact and position the business for recovery. On July 27, we closed financing of up to $150 million under the government of Canada's liquidity for airline sector resilience facility or laser program. This facility is now fully drawn and strengthens our liquidity position as we navigate a period of sustained fuel price volatility. The federal government has also made available an additional $250 million in funding providing further flexibility as fuel prices remain elevated well beyond initial expectations. Jean-Francois will cover the financial details shortly. Beyond the immediate fuel pressure, we remain firmly focused on strengthening Transat's long-term earnings profile. Our objective is to broaden our sources of revenue, deepen customer loyalty, expand our premium offering and capture more value for each booking. Our new loyalty program remains on track for launch towards the end of 2026. The program is designed to strengthen customer retention, increase engagement and create additional revenue opportunities across our ecosystem. The beta launch is already underway with over 23,000 members enrolled to date and member engagement outperforming our initial expectations. In parallel, we are advancing a comprehensive cabin reconfiguration program with the first modernized aircraft scheduled to enter service in the second half of 2027. The aggregate of our cabins will increase premium seating capacity, support ancillary revenue growth and enhance the overall customer experience. Together, these initiatives are designed to diversify our revenue base, strengthen margins and improved the structural earnings profile of the business over time. Turning to our operating metrics. Third quarter capacity increased by 6% year-over-year. Load factor was slightly below last year while year declined by 1%. As bookings progress through the summer, the competitive environment intensified. This plays pressure on yield and significantly limited our ability to recover higher fuel costs through fares. Nevertheless, transatlantic yield increased by 0.6% in the context of 8% capacity growth. While this performance did not offset the increase in fuel cost, it demonstrates the underlying resilience of our core transatlantic network. Our [ SAP ] program continued to be affected by the situation in Cuba with a cumulative revenue impact of $116 million. Turning to our operational and commercial update. Of our 41 aircraft at quarter end, 4 were grounded to the ongoing Pratt & Whitney GTF engine issues, one more than anticipated when planning our summer program. These disruptions continued to impact our operations throughout the quarter. Despite these constraints, we continue to execute our network strategy with discipline. Our focus remains on selective growth in market where our brand, fleet and partnerships provide a clear competitive advantage and attractive long-term potential. This summer, we launched new nonstop services from Montreal to Agadir, Reykjavik and Dakar as well as from Toronto to Tarana. The early performance of these routes have been very encouraging. As an example, we have already confirmed that our Montreal Dakar service will operate year-round beginning this winter supporting our objective of reducing seasonality, while developing the traffic flows across the network. For the upcoming winter season, we are maintaining a conservative approach to capacity growth in light of persistently high fuel prices. Capacity deployment will remain highly disciplined with a focus on our strongest performing markets and the most attractive opportunities for value creation. Partnerships also remain central to our strategy, including our growing portfolio of interline and codeshare agreements and our successful joint venture with Porter Airline. With that, I will turn the call over to Jean-Francois, who will review our financial results.

[Foreign Language] Good morning, everyone. This was a challenging quarter, driven mainly by persistently high fuel prices. Revenue and traffic grew, but the increase in fuel costs more than offset the growth and was the main factor behind our results. Revenues were up 3% in Q3 2026 or $26 million to $793 million on higher capacity and traffic. Adjusted EBITDA was negative $1 million compared with positive $81 million in Q3 2025. The decline was almost entirely attributable to higher fuel costs. Before the contribution under the LASR facility, fuel costs increased $105 million year-over-year. The fuel price rose 56% to USD 3.74 per gallon, I should say, from $2.40 last year. A $25 million contribution under the laser facility was recorded as a reduction of fuel expense. Reported fuel expense was there for $238 million, up $79 million or 50% from $159 million in 2025. Beyond fuel, salaries increased mainly reflecting the new collective agreement with our pilots and additional hours required to address operational disruptions, including aircraft availability constraints resulting from continuing engine issues. During the peak summer period, 4 aircraft remain grounded due to the ongoing Pratt & Whitney GTF engine issues, one more than initially anticipated. Additional unscheduled maintenance events affecting engines on our A330 fleet created further operational pressure. Together, these events required aircraft substitutions, schedule adjustments and crew reassignments contributing to higher overtime and other related costs. We continue to manage the GTF-related pressure through additional leased spare engines and active fleet management. Additional cost and revenue management and efficiencies are expected to persist until the issue is fully resolved, which is not anticipated before 2028. During the quarter, we recognized $7 million in compensation from Pratt & Whitney as revenue, broadly consistent with the prior year. However, this compensation once again did not fully offset the financial impact of the ongoing engine-related disruptions. Net loss was $107 million compared with net income of $400 million last year. The prior year results included a onetime $345 million gain on the extinguishment of long-term debt related to our government debt refinancing and is, therefore, not comparable. Adjusted net loss was $89 million or $2.18 per share versus an adjusted net loss of $12 million or $0.28 per share last year. Free cash flow was negative $302 million in the quarter compared with negative $122 million last year, mainly reflecting lower operating profitability and an unfavorable comparison with the prior year quarter, which benefited from $61 million in proceeds from engine sale and leaseback transactions. For the first 9 months, free cash flow was positive $4 million compared with $149 million last year. Cash used in operating activities was $221 million in the quarter compared with $105 million last year. Capital expenditures were $21 million compared with $30 million last year, and for the first 9 months, they were $53 million, down from $68 million last year, reflecting a tighter CapEx plan and the deferral of discretionary spending. Cash and cash equivalents were $243 million as at July 31, 2026, down from $390 million at the end of Q2 and up from $165 million at the end of fiscal 2025. Cash and cash equivalents in [ Transat ] or otherwise reserved mainly related to travel package bookings were $208 million, up from $194 million at the end of Q2 and down from $430 million at the end of fiscal 2025, reflecting the seasonal nature of our business. Customer deposits for future travel were $847 million as of July 31, 2026, compared with $822 million a year earlier. Long-term debt and deferred government grant were $448 million as of July 31, up from $320 million 3 months earlier. The increase mainly reflected the initial $125 million LASR drawdown and a $30 million draw on our subordinated working capital facility. Long-term debt and deferred government grant net of cash were $105 million compared with a net cash position of $70 million 3 months early. As Annick noted, on July 27, we closed our financing under the LASR facility administered by the Canada Enterprise Emergency Funding Corporation. Facility provides up to $150 million, which we have now drawn in full. It matures in July 2030 and bears interest at 3.91%. Since March, the cumulative additional fuel costs we have absorbed amounts to approximately $175 million. Beyond the LASR facility, the federal government has agreed to extend an additional $250 million loan under the existing LEEFF agreement, further supporting our liquidity as we work through this period. this multi-draw loan matures in 2035 and bears interest of 1.22% for the first 3 years and 3% thereafter. We will stay disciplined on both capacity and expenses supported by the additional liquidity from our recent financing agreements. Back to you, Annick, for closing remarks before the Q&A.

Thank you, Jean-Francois. In [ closing ], high fuel prices placed significant pressure on our third quarter results, but demand of our product remained resilient, supporting continued revenue and traffic growth. Looking ahead, fourth quarter load factor is currently 0.6 percentage points ahead of the same time last year, while yield is broadly in line. Capacity increase is 2% year-over-year measured in available seat miles. We are maintaining a disciplined approach to capacity, cost and liquidity while continuing to execute the strategic initiatives that will strengthen Transat's long-term growth. Finally, I would like to sincerely thank the government of Canada for its support. The financing strengthens our liquidity position and provide additional flexibility as we navigate the current difficult environment. I also want to acknowledge the incredible work of our employees in a period marked by significant challenges and uncertainty, they have continued to serve our customers with commitment and resilience. Thank you all. While near-term conditions remain challenging, we are taking the actions necessary to strengthen Transat's earnings power, enhance resilience and position the company for the future. This concludes our remarks, and we are now ready for questions.

[Operator Instructions] Your first question comes from Konark Gupta from Scotiabank.

I wanted to dig into the yield performance in the third quarter and your outlook for the fourth quarter. If I look at the airlines across the continent, most have reported 10%-plus yield in the calendar second quarter, and they are talking about stronger yield in the third quarter for them. I understand you have exposure to Cuba, which probably is higher than what these other airlines might have, but still, do you see any surprises or any incremental pockets of weakness in your network that explains the gap in your yield performance versus the peers?

Yes, good question. So we compete in a segment where customers are highly price sensitive. And this summer's environment was particularly challenging with industry capacity growth and exceptionally intense promotional activity across the Canadian market. In that context, our ability to fully pass higher fuel costs through [ fares ] was constrained. The reality that we are facing is that our economy segment, which is, of course, predominant. When we look at our performance in that segment, it is not materially different from that of our competitors or legacy carriers. The key difference plays above the economy cabin. Legacy carriers have premium, corporate and royalty revenue streams that have more than compensated for higher fuel costs across their networks. Unfortunately, we do not have those same levers at scale today. This is exactly what our loyalty program and cabin transformation initiatives are designed to address.

Makes sense. And then Jean-Francois, perhaps on the balance sheet side, you guys have tapped in fully on the laser facility and also signed up the LEEFF incremental LEEFF loan facility. Can you help us understand in light of the fuel price environment today, and obviously, we are seeing a little bit more pressure in the last few weeks or days with Iran situation. Do you think these loans you have capped here would be enough do you satisfy the liquidity needs you might have for the next several months? Or you may have to relook at some of the options?

Well, that's a difficult one. Obviously, related to the fuel markets on which we have no control. But that being said, when we look at the forward fuel price curve we're going to be okay. We feel that the amount of money that we are able to get from the federal government and the additional funding that we're getting now will be sufficient. But that situation obviously is dynamic is volatile. And I don't know precisely where fuel prices will be in a month and 2 months or a year from now.

Okay. So based on the current forward curve, you feel like it's [indiscernible].

Absolutely. Based on the forward curve, we'll definitely fine.

Yes. Your next question comes from Cameron Doerksen from National Bank.

I wanted to ask, I guess, about the capacity plans. I mean you mentioned some of the initiatives you're taking to kind of improve the premium yields, but that obviously is not something that's going to impact you significantly in the near term. So I guess most airlines when they face higher fuel prices in the past have significantly cut capacity. I'm just wondering why add any capacity in Q4 just given where fuel prices are? I mean, it seems like the only way you're going to get yields up is to reduce some of the capacity?

Yes. The increase in capacity in Q4 is very limited. It's [indiscernible] so we're keeping a conservative approach. And when we look at the upcoming winter, there won't be any capacity increase. So looking at the overall patterns that we're seeing, we feel comfortable with the capacity that has been deployed.

Okay. And maybe you can just expand a little bit, I guess, on the premium cabin upgrades that you're doing. I'm just wondering when it's kind of all said and done, how much figure of an increase in premium seating will you have on average on your aircraft versus what you have today? I'm just trying to get a sense of how this could improve the yield profile as we look ahead a couple of years.

Yes. So that's part of our strategic initiatives. Unfortunately, we cannot disclose a number at this point. This is something that we're going to be able to share later on as we deploy the new cabins.

Your next question comes from Tim James from TD Cowen.

I just want to turn to Cam's question actually for a minute, just thinking about the fourth quarter capacity and the 2%. How do you approach that? Like do you have the ability to actually reduce that capacity? Or once you start selling, because you've sold some of these seats that will be provided in the fourth quarter months and months ago, do you actually sort of have the ability or can you cancel those flights? Or do you take those actions? I guess where I'm going with this is if you were to sort of decide on the idea of Q4 capacity today, would it still be a 2% growth or is part of that because already sold some of these seats and these flights months and months ago at a lower fuel price environment?

I just want to clarify, in terms of sales, we are below 2% compared to last year. And the [ ASM ] or plus 2%, and this is strictly due to the removal of Cuba. So we are not doing any increase in the market. And to respond to your questions, as we move along through a season, we always adjust capacity based on performance to make sure that we protect the highest margin as possible. So the cleanup has been done for Q4. If you recall, at the beginning of spring, we reduced 6% capacity for the whole summer, and then we made other adjustments throughout the summer. So we've done based on the fleet that we have, we've done all the actions that were required to maintain a conservative capacity.

Okay. That's helpful. Then just thinking about the yield and the year-over-year yield comparisons, obviously, your tripling and your route mix can influence yield. Can you just maybe give us a sense for on an apples-to-apples basis across the network, what are actual fares for you in Q4 at this point and maybe Q3 as well. How has fares changed year-over-year on a route comparable basis?

Yes. So [ fares ], when we look at the fares for Q4, we're looking at an increase of 6%. When we look at Q3, we had 4.8%. But you need to understand that the mix and the network change in an important [ fashion ] and the removal of Cuba. So when we look at yield, of course, it is much more laid out on longer distance since Cuba represents shorter distances. So we're okay with the increase in TMC. However, when you look at the unit revenues, it doesn't cover for the loss of Cuba. That was a highly performing market, especially in summer, but as well at the end of last winter. So we're looking at next winter. Of course, Cuba won't be there anymore so we have adjusted to make sure that the capacity for [ self-definition ] is well balanced. So of course, Dominican Republic will play a big growth performance so far is very high and trying to redistribute this capacity to maximize our performance for next winter.